Starbucks Will Win the Wi-Fi War

Some have decided that Wi-Fi is a profit killer, and they're shutting it down. Others, most notably coffee giant Starbucks, have gone in the opposite direction, moving from limited Wi-Fi to free and unlimited access for everybody.

Both extremes are right. But Starbucks will prevail. Let me explain.

Why Wi-Fi is Bad for Business

The Los Angeles Times this week chronicled a new trend in coffee shops -- no more Wi-Fi. They listed some Silicon Valley coffee joints that have either shut down Wi-Fi altogether or started restricting use during busy times of the week.

New York Times writer Nick Bilton recently described his shock and horror after being told by a Manhattan coffee shop employee that he wouldn't be allowed to use his Kindle. Not only does the store offer no Wi-Fi, they don't even want you using a quasi-computer that doesn't need Wi-Fi.

The problem is that coffee houses have been taken over by laptop homesteaders. Annoying bandwidth hogs buy cheap cups of coffee, then tie up tables for hours.

Even coffee places without official computer-use policies are asking people to move along when no tables are available to paying customers. This happened to me recently. I went early to a popular local coffee house and bakery in L.A. I was at first the only customer. An hour later, however, the place was packed. The owner approached me and politely asked me to take a hike.

Coffee shop owners have noticed a disturbing evolution: Offering Wi-Fi thrills selfish digital cheapskates who want to sponge off the free connectivity, but it angers the best customers -- those who want to spend a lot of money, enjoy a table for 10 minutes and leave.

Why Wi-Fi is Good for Business

Starbucks used to offer limited free Wi-Fi to people who used Starbucks cards. But the company recently announced totally free and unlimited Wi-Fi for all customers.

The move was the first stage in an aggressive new strategy to offer branded content through what they call the Starbucks Digital Network. Starbucks will soon offer customers free access to The Wall Street Journal, The New York Times and USA Today. It will also lure customers with free Apple iTunes downloads, Zagat restaurant reviews, a "Wellness Channel" about health and lots of other content. (I wonder if the "Wellness Channel" will warn readers about the most immediate threat to their health: fatty, sugary Starbucks products.)

No, it's not some sinister plot. The purpose of all this free content is to upsell customers into subscriptions, of which Starbucks will take a percentage. It's a win-win for Starbucks, which can lure customers with free content, then gain extra revenue from subscription sales. And it's a win for content providers that need to caffeinate tired subscription revenues.

The Middle Way is the Wrong Way

Peet's, a largely West Coast rival to Starbucks (actually they used to be the same company), sticks to the middle path. It started by offering two hours of Internet connectivity, which required you to ask for a password at the cash register. Inexplicably, they subsequently announced that they had reduced the time to one hour, although the limit isn't actually enforced.

The Peet's approach is the worst of all worlds. Like Starbucks, the stores are filled with laptop campers who jockey for outlet access and use up all the tables. Buying coffee and then discovering that there's nowhere to sit is a very common occurrence at Peet's. Meanwhile, those laptop users aren't happy. The one-hour stated limit and the need to go ask permission feels unwelcoming. (Asking for a password is like asking for a bathroom pass in high school.)

Peet's would do better to either kill Wi-Fi altogether -- and thereby free up some tables -- or make Wi-Fi free and unlimited, which would thrill those laptop users lucky enough to find tables. As it is, nobody is happy with the seating arrangements or Wi-Fi service at Peet's.

Why the Extreme Policies are Right (and Why Starbucks will Win)

The ugly truth is that free Wi-Fi gives advantages to large companies over small ones. The larger they are, the more they benefit from free Wi-Fi.

The reason is obvious: Chain stores are big. Because Starbucks is massive, ubiquitous and global, it can be a media, marketing and advertising platform. Its scale enables Starbucks to both efficiently provision Wi-Fi and leverage it for profit. Another benefit is that spreading the word about free Wi-Fi and free content encourages customers to visit Starbucks chain stores while traveling.

Small companies offering Wi-Fi, on the other hand, often struggle just to provide the service. Thrust unprepared into the unhappy role of IT support providers, proprietors of mom-and-pop stores are alone in dealing with technical problems, malware and hackers. Because small coffee shops are small, they can't make lucrative content deals the way Starbucks can, so the Wi-Fi doesn't pay for itself. And finally, thrilling a local customer with Wi-Fi doesn't pay off when they travel. They go to Starbucks anyway.

I believe that free Wi-Fi plus free content partnerships plus 11,000 stores in the U.S. is the winning formula for dominating the coffee shop industry.

Many small coffee shops are probably better off simply shutting down their Wi-Fi networks, depending on the number of tables and the nature of their local clientele. So many people have mobile broadband these days that Wi-Fi probably isn't worth the trouble for the smallest coffee houses. Mobile broadband users can still use laptops while they enjoy their lattes, but they're not tethered to the coffee shop's network and therefore don't need to sit there all day.

But that doesn't mean small coffee joints will be OK. The decimation of local coffee shops will probably accelerate now that Starbucks is offering both free, unlimited Wi-Fi and also free content that costs real money elsewhere. Starbucks is taking advantage of a change in the economics of coffee shops, a change that's great for Starbucks and lousy for small coffee houses.

That change is caused by the digital revolution. People hang out in coffee shops to socialize and read. The way we socialize and the way we read is changing. It happens over the Internet now. But only the largest chain -- only Starbucks -- is in a position to monetize this cultural change.

The transition will be nearly identical to the destruction of small video stores by Blockbuster years ago. However, Starbucks will be spared the same fate as Blockbuster, which is being destroyed by Netflix and movie downloads -- at least until somebody figures out how to send coffee over the Internet.

And Peet's? Yeah, they have a lousy Wi-Fi policy, but they'll do just fine. They have a unique strategy: They make good coffee.